Current state of ESG discussions in Korea [Brought to you by DR & AJU]

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ESG is a concept that collectively refers to the environment, social and governance, which are non-financial factors of a business. ESG was brought to light during the evolution of the concept of “sustainable development”, which began in the 1970s.

Currently in Korea, although a consensus is forming around the idea that “ESG risk management is the key to sustainable development”, concepts regarding ESG standards and assessment have yet to be completed. be clearly established. However, while the trend to actively reflect ESG in investment decision-making has continued with global financial firms and investment banks at the center of the trend, discussions are also gathering pace in Korea, including those around the introduction of its own ESG index.

Discussions on ESG in Korea extend towards public disclosure of governance issues and sustainable management of companies, starting with responsible investment focused on pension funds. Responsible investment related to ESG started in earnest in Korea with the amendment of the National Pension Law on January 28, 2015, which enabled the National Pension Service of Korea to take into account environmental, social and governance factors. related to the investment objective when managing the Fund. with the aim of achieving a stable and long-term increase in revenues, and the publication of the Code of Stewardship by the Korea Stewardship Code Council (December 2016). Since the adoption of the Management Code in July 2018, the National Pension Service has changed its fund management principles so that ESG factors are taken into account.

Public disclosure of ESG matters is also currently progressing through activity reports (mandatory), corporate governance reports to the stock exchange (voluntary / mandatory) and sustainability reports (voluntary). In the case of public disclosure of corporate governance reports in particular, disclosure began to become mandatory in 2019 for companies listed on the securities market that have total assets of $ 2 trillion or more, and in 2022 the scope should be widened. in phases to listed companies with total assets greater than or equal to $ 1,000 billion. Disclosure of sustainability reports is currently voluntary, but more and more of the companies that publish the reports have voluntarily disclosed them to the Korea Stock Exchange (KRX). Examining this in detail, in January 2021, the Financial Services Commission announced its three-phase plan for public disclosure of sustainability reports; it is expected that from 2025 KOSPI-listed companies with assets of KRW2 trillion or more will be subject to the obligation and that by 2030 all KOSPI-listed companies will be subject to the obligation.

In addition, the size of ESG funds and ESG bond issues in Korea shows a steadily expanding trend. In the case of ESG funds, the trend of increasing size and capital inflows has accelerated in recent times, and ESG bonds are also growing rapidly, with a total of 549 ESG bond issues listed in Korea (82.6 trillion KRW in quoted amount) as of December 2020. However, some consider that with the exception of certain financial companies and public investors, the response to ESG shown by the domestic financial sector in Korea has remained generally weak until ‘in early 2021, and the response has increased in phases since 2021.

As the global trend towards strengthening ESG standards is set to accelerate, the Korean government is also preparing to formulate various policies regarding supports and benefits to enable companies and investors to respond systematically.

In this regard, in April 2021, based on his judgment that a flood of rating agencies – with 600 odd rating indices in operation both domestically and in Korea and abroad – compounded the confusion from companies as a valuation object, the Korean Ministry of Trade, Industry and Energy has started work on the introduction of a K-ESG index, which would be the index most suited to Korean circumstances. The draft K-ESG index that has been revealed to date has been prepared by focusing on the key questions that were derived from an analysis of, and which were common to, 13 major indices deemed to be both national and foreigners, and is considered to have been composed of questions on public information disclosure, environment (E), social (S) and governance (G) in balanced proportions so that they are not biased in a particular direction. The main content of the K-ESG index is as follows.

Category

Details

Public disclosure of information
(5 question)

Public disclosure of information

Method of public disclosure of sustainable management information, scope of establishment of the company, objective

Environment

(14 questions)

Environmental management policy

Environmental policy and organization, response to climate change, etc.

Achievements in environmental management

Environmentally friendly company, environmental management achievements such as volume of waste and recycling rate, communication with interested parties, etc.

Environmental management audit

Support for suppliers in environmental management, etc.

In accordance with the laws

Violations of environmental laws

Social

(22 question)

Corporate social responsibility policy

Corporate social responsibility strategy and objective, etc.

Officers and employees

Diversity of managers and employees, recruitment, etc.

Human Resource Management

Training of officers and employees, capacity building, etc.

Working environment

Questions related to occupational safety, etc.

Human rights

Human rights policy, education, etc.

Suppliers

Supply network, results linked to mutual growth, etc.

Local community

Participation and activities related to social contribution to the local community, etc.

Information security

Current state of security of personal information, etc.

In accordance with the laws

Violations of laws in the social category

Governance

(20 questions)

Board of directors

Diversity of board, activities, etc.

Shareholders

Shareholder rights, dividends, etc.

Ownership structure

Ownership structure, etc.

Ethical management and fight against corruption

Ethical and anti-corruption management, legal status, etc.

Audit

Questions relating to the organization of the audit, etc.

In accordance with the laws

Violations of governance laws

In addition to this, the Korean government is currently developing a K-Taxonomy which, although based on foreign taxonomies such as the EU and ISO, would take into consideration the economic and industrial conditions in Korea; the plan is to announce the K-Taxonomy in the fourth quarter of 2021.

The outlook on important ESG issues and the level of social agreement on these issues vary for each country. Therefore, companies doing business in Korea should pay attention to the ESG standards and assessment in Korea and update them continuously.

DR & AJU reflects on ways in which companies can improve their enterprise value through ESG risk management and provides support so that they can have the opportunity to create a new driving force for business.


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Sang Bong Lee So Hyun Ki


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